Compared to expectations, electricity prices in the National Electricity Market pool and in the futures market have been higher than expected.

Figure 1 Pool prices: Source NEM Review

Demand is flat for the year to date, pretty much across all regions. The average price could be at its levels because of a few very high-price days, but in fact nearly every day in 2019 has seen higher average prices than the same day a year ago.

Not only are prices up but they up at a high level, $101/MWh in NSW, $110/MWh in Victoria. This is the March quarter, so summer, but even so. We can get a further perspective by looking at a longer term average across the three main States:›

Figure 2 Pool prices: Source: NEM Review

The first thing you see in the chart is the sharp rise in prices from FY16 as the Hazelwood closure plus all the prior closures (due to low prices) and keeping Portland open combined with a rise in gas prices to drastically tighten the supply demand balance and raise costs.

Then you notice how the Queensland Government was able to force prices in that state down in 2017 after having forced them up in previous years.

Coincidentally or not the fall in Queensland was followed by falls in Victoria and NSW although not to the same extent, but then we can see prices rising, particularly in Victoria but also in other states including Qld.

Fig 2 above is effectively a 365-day moving average, so it’s actually lagging what’s going on by some distance. We accept the lag in order to smooth very volatile daily prices.

Forecast wrong? We’ll just explain the past, it’s a lot easier.

Alternatively those who don’t understand history are doomed to repeat it.

We think there are three main contributing factors to the higher prices:

New wind and supply has come on line much slower than expected

Wind and utility solar annualized production, that is daily average in calendar 2019 to date * 365, is up nearly 8 TWh

But that’s nothing like what we expected. ITK thinks there is 2GW of projects that are only partly operating and a further 5GW in about 20 large projects and some small ones where construction work has started but which have not been energised.

Big projects like Stockyard Hill (530MW of wind) are about a year behind where I thought they’d be. And, of course, difficulties of connecting to the grid are now our daily grist.

The point is even the 5GW under construction won’t be nearly the end of it. But that’s another story. What’s relevant today is all that new supply, about 8% of total demand in the NEM is yet to impact prices and some of it had been expected to.

Coal and gas prices are stubbornly high – coal generation is expensive

It’s hardly worth talking about gas prices. Barring a collapse in oil gas prices will stay high for the next year or two at a minimum. Gas generators buying spot gas need about $100/MWh to get out of bed.

Coal prices are down a touch on last year but in NSW if you needed to buy Japan spec coal at spot prices (that is good coal rather than the high ash garbage NSW consumers have to put up with) then the fuel cost is about $55/MWh (that is, A$130 per tonne of coal @ 0.42 t/MWh).

Then you can add $10 MWh for other costs and maybe another $8-$10 for maintenance capex. So a spot coal buying generator really needs $7/ MWh. This is what makes me laugh about the numb-nut comments that coal generation is cheap. It aint, at least in NSW.

Even in Victoria costs are a lot higher than they were. Coal and gas do have pricing power though, and that’s important.

Hydro availability is lower than it was

Guess what folks, there’s a drought on.

As far as dam levels go the situation is far from extreme, as a general statement, but nevertheless we suspect the Hydro operators are thinking about the water they need for their “cap” contracts and are less inclined to chase volume than they were.

A peculiarity of Snowy is it has a large ( more than 1 million) retail customer base and this confers an obligation to purchase REC’s. Every second year or so Snowy generates harder to produce above its baseline for REC creation, but we think this is an off year as far as that goes.

To sum up:

We have lower than expected new wind and solar, due to unexpected connection difficulties and some projects just being slow to get going. We have high coal and gas costs and these have not really softened in the past 12 months. We have lower and tighter water availability for hydro generation.

Those things alone would be enough to make prices go up, but there remain questions around market behavior. Those questions will come more to the fore when we do see all that new supply come on line. It will eat into somebody’s lunch and the question is how the market will behave when that happens.

Suffice to say that flat load futures prices in the out years, that is 2020 and 2021 have gone up. So right now the market expects higher prices than it did.

Similarly at a recent gas conference I asked about 150 people in a session did they think prices would be lower in 5 years time. Only about 1:5 did. That’s what makes a market the 1 and the other 4.

The market action

Figure 3: SummaryFigure 4: Commodity prices. Source: Factset

Volumes

Figure 5: electricity volumes

Base Load Futures, $MWh

Figure 6 Baseload futures Financial year average. Source: ASX

Looking at FY22 is misleading as there is no trade. One thing South Australians can be happy about is that in FY21 electricity prices there are about the same as in NSW and Victoria despite the reliance on gas. Near term futures are rising in NSW and Victoria in particular.

Figure 7 Quarterly futures Source: NEM Review

Gas Prices

David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.

David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.